What kids should know about money, at what age
So, you finally sit down with your high-school graduate to have The Talk -- about money. Guess what? You're 15 years too late.
Money experts agree that financial education for kids can and should start around 3 years old. That's when "executive function," or the brain's mental muscle, begins to develop, says Elizabeth Odders-White, associate dean at the University of Wisconsin-Madison's Wisconsin School of Business. By 3, children begin to develop cognitive control; their brains are ready and able to learn. "There's not a huge difference in absorbing financial information and other information," says Odders-White.
Early financial education helps children form healthy money habits and a healthy attitude toward money. Odders-White's research identifies three major periods in a child's cognitive development that lend themselves to financial training: Ages 3 to 5; 6 to 12; and 13 to 25, with 25 being the age when executive function fully develops. Here are milestones and teaching opportunities within those categories.
Getting started: Ages 3 to 5
The goal: Teaching the concept of money.
Kids that age can put money in a piggy bank, says Kim Daley of Lindon, Utah, the founder of Kidbudget.com, a financial literacy program for kids. By age 3, children should start learning the concept of money. Daley says her grandson receives stickers when he hits certain points in the potty-training process. When he saves enough stickers, he can buy something.
By age 4, kids are able to understand the connection between money and things. Start by teaching them the math of money: 10 pennies to a dime, 10 dimes to a dollar and so on. One fun and educational game: Sort coins and bills together and show kids how to make change, says Pamela Yellen, a Santa Fe, New Mexico, financial literacy expert and author.
At this age, children can also help make shopping lists, then fulfill those lists at the store. Using cash is key, Yellen says, as it teaches kids not to overspend. With cash, "You're making the connection between money and things in the home," Yellen says.
The middle: Ages 6 to 12
The goals: Understand long-term planning and gaining control over money. That means freedom to buy, save and spend, with parental guidance.
By age 6, if not earlier, kids should understand the connection between work and money. Yellen suggests paying children for work, whether it's for chores such as making their bed or unloading the dishwasher, or extras such as raking leaves.
Creating a mental association between completed work and money teaches responsibility: "Just like you have to show up at the office or make a certain number of sales a week," Yellen says. She advises dividing proceeds -- allowance, cash gifts, etc. -- into three piles: 45 percent for savings, 45 percent for spending and 10 percent for charity.
By age 8 or 10, kids should understand the difference between needs and wants, "and that you have to fulfill needs before wants," Daley says. Shopping trips for school supplies offer ample opportunity to teach this lesson. For instance, a child can need one pair of sweatpants; two extra pairs are a want.
We know that people have vivid memories of negative experiences around money, and that has an effect on how people view money.
University of Wisconsin
Another example: That Vera Bradley backpack is cute, but back at school, the math club needs its weekly dues. At this point, kids should be spending their own money, if possible, to reinforce the connection between money and the things it purchases. "Having them spend their own $10 is better than having Mom or Dad spend it for them," Daley says.
A caution here from Odders-White: Avoid language that might create negativity or unhealthy stress around money. "We know that people have vivid memories of negative experiences around money, and that has an effect on how people view money," she says.
One example: While shopping, instead of saying, "We can't afford that," remind the child of choices: "We could buy X, but then we can't buy Y." Positioning the purchase as a choice, rather than denying it, teaches children resource management and delayed gratification, both habits of financially astute adults. "That's a key piece of what happens in this age group," Odders-White says.
By age 10 at least, and certainly 12, kids should be working their way toward financial independence. They should understand saving for long-term goals; a new basketball in six months, college in six years. "A 10-year-old should be able to buy a camera," says Daley, pointing out that her daughter did just that, and watched for sales and coupons to make sure she got a good deal.
Preparing for flight: Ages 13 and up
The goal: To prepare children for the financial responsibilities of college and young adulthood.
By age 15, kids should be allowed to make mistakes with money -- whether it's an impulse buy that collects dust in their closet or paying full price for an item, only to see it at the store, marked down, the next day. At this point, kids should also learn how interest works and how to manage loans, how to responsibly use credit and debit cards, and how to invest.
Why so young? "They are bombarded as soon as they leave home," Daley says. "They get credit cards, student loans, all those things. They should have a good understanding of those principles before they go off to college."
All this sounds daunting -- but it shouldn't be. Yellen and Daley point out that most financial skills can be imparted organically via everyday life, during vacation planning and grocery shopping, while stocking up on school supplies. Yellen suggests a systematic approach, a monthly family financial meeting -- with the admonition that kids not share family finances on social media.
"Look at spending as a team and goals going forward," she says. "It allows you to be really, really open."
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